Investing in multi-family housing can be an excellent way to build wealth and add to your portfolio. However, not all properties will produce the same returns. In our latest post, we share our tips for finding the best multi-family investment properties in Metro Detroit!
Investing in multi-family properties is a bit different than investing in single-family properties. You will need to do a few things ahead of time to prepare yourself for this larger commitment so you don’t get in over your head..
Set Your Criteria
Before you start looking at available multi-family properties for sale in Metro Detroit, you should first set some criteria. You don’t want to buy out of your means and find yourself stuck with a property you can’t afford or aren’t able to manage. First, decide how many units you are comfortable managing. If you are not going to be managing the property yourself, talk to local property management companies in your area to get an idea of what they charge in fees each month.
Know What You Can Afford
Getting a loan for a multi-family property can be a bit different than getting a traditional loan. Lenders often see investors as being riskier, so the criteria to qualify can be steeper. Make sure you have a high credit score or that you work to improve it before attempting to qualify for a loan. You will need to have a solid down payment and cash reserves set aside. You can expect to pay a higher interest rate and more fees upfront when working with many lenders to purchase a multi-family home.
Know The Numbers
You can expect to do your fair share of math when choosing the right investment property. Before working out any equations, you will need to know what the units are renting for, average maintenance costs, estimated property taxes and more. There are a few equations investors use to quickly determine if a property will be a good value. These include:
- The 50% Rule – The 50% rule states that you will spend about half of what you are charging in monthly rent toward expenses for the house. That might sound like a lot, but when you factor in taxes and turnover, it can be a good way to prepare yourself for what’s to come. So if you are renting out a house for $2,000/per month, expect to pay $1,000 per month in expenses. If you have a mortgage on the house, deduct that from the remaining 50% and that should give you a good idea of your monthly profit.
- The 1% Rule – The 1% rule state that a property should be bringing in 1% of the sale price each month in rental income. So if you pay $250,000 for a property, you would need to be making $2,500 in rental income each month for it to be considered a good investment.
Have An Exit Plan In Place
As with any investment, you should always have an exit plan in place. What happens if you need to sell the property? How much will you allow yourself to spend fixing up the property before cutting your losses and walking away? Always invest with them in mind, knowing what you want to achieve with the property as well as when to know when it is time to get out.
Consider living onsite. A property with 4 units or less can be purchased with an FHA loan, requiring a very small down payment. Owner-occupied investment properties are a great way to begin investing with lower overall costs. Many times, the rental income you receive from the other units, will be able to pay for your mortgage each month. Don’t forget to account for your ownership costs as well as a possible decreased sense of privacy.
Before investing in any multi-family investment property, seek advice from your lawyer and accountant. You will want to entrust your purchase to experienced professionals who can help you make the right multi-family property investment in Metro Detroit!